I was meaning the scenario just as you described where the assets just zigged and zagged around taking turns to rise and fall with no long term trend for any of them. That is what stocks have done for the past decade and perhaps is what they "normally" do if you exclude the freak event of the 1982-1999 bull market. Perhaps eventually the gold bull market will run its course and then gold will do the same.
If the zigs and zags are large enough then the portfolio gains needn't be slight. Imagine if the assets alternately halved and doubled in price. Look at what a rebalanced 50% EDV: 50% silver portfolio does at times even if you just go between time points where silver has traced back to where it was at the start.
Stone, I backtested silver vs zeros from 1952-2011. The performance of a portfolio of half silver/half zeros rebalanced annually couldn't even beat inflation from 1952-1971 despite the assets having a roughly -0.326 correlation over this time period. For that matter, the performance of say $1,000 put into both (half into each so $500 into silver and $500 into zeros) didn't really provide much of a different result from 1952-1971 than putting $500 into each in 1952, not rebalancing at all, and checking at the end of 1971 to see what you had (which would have been a sum of money-roughly $1150 whether rebalanced or not-that was higher in nominal terms but lower in absolute terms than what you'd started with).
From 1972-2011 the results were rather more impressive for a rebalanced vs non-rebalanced mix of 50/50 silver and zeros. The non-rebalanced portfolio ($500 apiece put into each in January 1972 and never rebalanced but checked again on December 31st 2011) left you with roughly $26,000 ($7,500 in silver and $18,500 in zeros). The annually rebalanced portfolio left you with almost $84,000 despite the fact that silver and zeros during the period 1972-2011 had a negative correlation of only -0.137. I would note that the non-rebalanced portfolio had you ahead for several years starting in 1979 but by 1982 the advantage reverted back to the rebalanced portfolio (needless to say both portfolios suffered staggering losses-upwards of 30% per year in nominal terms and 40% per year in real terms-in 1980 and 1981).
In any event, silver (or gold) and LT zeros may both be getting ready to fall together. If that happens in the coming years (and I'm not saying it will but it might) then look out below....
The only thing I'm certain of is that nothing exponential is sustainable unless it is entirely imaginary.
True that...what was it Ken Boulding said? "Anyone who believes that infinite exponential growth is possible in a finite system is either a madman or an economist." Of course this means that any investment strategy, PP or not, will eventually (unless we can research new and better non-depleting energy sources and find better ways to recycle our wastes...or unless we expand into space) bump up against the hard limits of resource constraints in a finite world.
If inflation/deflation equally affected all types of prices and debts then it could be said to be entirely imaginary. But it doesn't so it isn't. I suspect that eventually we will have to face up to the reality that we can’t sustainably use nominal smoke and mirrors effects such as inflation to manage the economy. Instead mild deflation to keep up with improving technology is what reality is and what a non-distorting monetary system has to reflect. Something like moving tax to being an asset tax IMO is a much better approach than trying to aim for 2% inflation and failing dismally instead getting wage deflation and escalating asset price/commodity volatility. Currently it is tax advantaged to hoard money rather than training staff or building machines etc. If that wasn't the case, then deflation wouldn't screw up the economy in the way it would with our current tax system IMO.
Correct in that if you don't have an asset tax-since you don't have inflation to act as one-or something like it, in a continuously deflationary economy people would be rewarded each year with a larger share of goods and services the economy produced for simply stuffing money under a mattress. They didn't even have to loan that money out or make investments with it (or even deposit it in a bank to be loaned out to others). They were rewarded for doing nothing. AN asset tax would put the kibosh on that (although a 7 or 8% asset tax would be a big incentive to hide any non-interest earning physical cash money and not report it IMO).
Inflation sucks. And I think it probably is worse in just about every case than deflation.
Craig, do you really think people were worse off under the high inflation from say 1972-1980 than they were under the deflation from 1929-1933? Look at per capita income growth, industrial production, inflation-adjusted year-over-year GDP growth, poverty rates, unemployment rates, etc and tell me how you think people (at least average working Americans and not those few wealthy who owned enough AAA corporate bonds or Treasuries to live off the interest) were worse off during the 1970s than during the Great Depression. For that matter, how have all of the above (per capita income growth, industrial production, inflation-adjusted year over year GDP growth, poverty rates, unemployment rate) been for Japan from the early 90s (deflationary) vs Japan from say 1950-1971 (they had about 4.4% average inflation during those years)? Neither was especially bad for the average Japanese but I think deflation affected most Japanese less than it would most Americans for two reasons:
One, as already mentioned by Moda, the high Japanese savings rate meant that job loss wasn't as devastating financially to most Japanese as it probably would be to most Americans. I'm also not sure what kind of social safety net Japan has as regards UI, welfare, universal healthcare, housing benefits, etc but if they had a more generous one than America it could also be another reason the higher unemployment , slower growth, and deflation (from 1990-2011 vs from 1950-1989) didn't hurt them as badly as it might have hurt the average American.
I also would ask you to consider that deflation probably didn't hurt the average Japanese as much as it might have his American equivalent due to Japan's corporate culture and society. Japanese firms didn't fire workers as readily as American firms would have when the economy turned soft; executives and stockholders were expected to share in the economic pain. Japanese executive pay is maybe 15-20 times average worker pay, Japanese corporate leaders don't typically get rewarded with bonuses even if the business fails or for laying off half a company's workforce, and stockholders have for the better part of two decades now had to accept 4% or less ROE on average and stock prices below book value in Japan, whereas in America it's "maximize shareholder value and damn the consequences" and executives are often paid several hundred times (in some cases several thousand times) what most employees make and can still collect huge bonuses even if the company fails, stockholders don't make any money over many years, or the corporation is run so poorly they end up having to fire much of their workforce. You can't compare Japan and America (or Japan and second or third world countries) and say that deflation would affect us the same here....in the US some groups would feel more pain under deflation than in Japan.
I get upset when I read about economists saying they want inflation. They have not looked at other places where the "dream" came true. Or if they have they didn't understand what really happened by talking to people that went through it. I was speaking last year with someone from Argentina that lives in the states now about what happened in 2001. I mentioned how economists thought it was a good thing what happened. But for her she would get red-faced angry and go into many stories about people losing everything. I just have to take her word for it that losing 2/3rds of your life savings almost overnight is not good. Great for exports and foreigners, true. But really bad for the people living there.
Yeah, well, it sucks to be her (although if there weren't laws forbidding buying gold, commodities, or foreign currency, she must shoulder some of the blame herself IMO because she could have prepared and did not) but I don't see this as much different than someone keeping their savings in wheat or oil or gold and then losing maybe half of it or more in years like 1981-2000 (for gold) or 2008 (for commodities).
Besides, what was the alternative for Argentina? If it had abandoned the dollar peg and defaulted on its debt but NOT deliberately devalued and/or inflated, do you really think the market wouldn't have given its currency a massive haircut (and thus chopped its citizens purchasing power by a good chunk anyway) anyhow? Or should Argentina just have tried to repay foreign (USD IIRC) denominated debt that had become huge relative to its GDP and had its citizens suffer under austerity and high taxes to repay said debt (look at Ireland or Greece to see what happens when you have too high of debt to GDP and it's denominated in a currency you don't control)? For that matter, what would have happened to Iceland (and its citizens) if they had had to repay their debt (which wasn't their national debt but their bankers'...but it could have been if their government had assumed it like Ireland's did) that was almost six times the size of their GDP instead of repudiating the debt, devaluing the currency, and imposing capital controls? Has there ever been a historical example in the last 70 or 80 years where a country got out of debt by defaulting on its obligations (or alternatively, when the country didn't default but there was an asset bubble followed by huge financial crisis and its large banks/lenders/corporations did default) but then there was deflation and the deflation helped the country recover? It seems the opposite is typically true, you either have a sovereign default (Argentina 2001, Russia 1998) or large scale financial corporation default (Iceland 2008, Malaysia 1997-98, Thailand 1997-98, Sweden 1990) followed by inflation and/or devaluation (either by your own government or by the market deciding that if you aren't going to pay your debts maybe your currency isn't worth as much as they thought), followed by recovery as the debt burden was lifted by partial or full default and (to the extent it was paid back) by being paid back in devalued currency. For that matter, didn't the inflation of the late 1940s wipe away about 1/4 of the US and UK's war debt and allow more of their citizens' money to be spent or invested rather than being used for debt service?
I'm not saying that inflation or devaluation is good, per se (it isn't)...I'm just saying that sometimes the alternative (years of debt slavery in Argentina's case) might well be a whole lot worse for the country overall and many of its citizens.
Lastly, I think it's a mathematical impossibility that gold could continue to provide a growing economy with a stable medium of exchange once it's been mostly mined. If inflation is "too much money chasing too few goods," and deflation is the opposite, then the supply of gold would have to continue to grow with the economy to be a stable medium of exchange. Fiat currencies can much more closely grow to economic output capacity than gold can in the modern economy. You say deflation is bad for business just like inflation is... well it's a mathmatical certainty that gold as a common medium of exchange in a growing economy would result in either severe deflation, or no growth. There's really no other way around it.
Moda, you could allow the money supply to grow by either letting banks issue their own notes (or today, by doing the electronic equivalent) based on a certain amount of gold held in reserve...if you wanted to let the money supply grow you'd reduce the reserve requirement from say one ounce of gold for every ten notes to maybe one ounce of gold for every eleven notes. This was (roughly) what we had before 1857 and it worked OK most of the time (although I'm not sure I'd recommend it as there were various panics and crashes along the way as banks sometimes issued too many notes and people tried to redeem them and couldn't; waves of bank failures were the result). But you are right that in a pure 100% reserve requirement gold standard there will be deflation if the economy grows faster than the gold supply.
moda Germany was a total mess in Weimar times but it was still Germans there. I agree that it was a problem of distribution (ie everything in the entire country was owed to the WWI victors) but it still shows that a dire economic mess can make "good" people barbaric.
Stone, wasn't the "economic mess" that helped bring Hitler to power the Depression and not hyperinflation? The inflation was in 1922-1923 and the Nazis didn't gain real power until the 1930s (the Beer Hall Putsch in 1923 failed miserably). I know they did blame Germany's woes on the Versailles treaty reparations and (unfairly, since it was the government's fault) pinned the blame for the 1920s hyperinflation on "Jewish bankers and speculators" but do you really think the Nazis would have been able to take power if it wasn't for the Great Depression?
One tweak that was proposed to guard against a simultaneous steep correction in LT bonds and gold was to switch the barbell approach to a traditional five year treasury ladder. I did this when LT bonds hit about 3.8% and gave up a considerable amount of gains in the last months. Embarrassed
Short of getting into emerging market debt or other exotic securities I don't see any safe options to park money right now other than treasuries....
Yes, two assets getting hammered would probably result in a loss, but what assets out there could be used as a substitute right now to prevent a scenario like this from occuring?
doodle, I don't know of any "tweaks" right off hand that would fix it. Tweaking the PP by tilting it (more cash, less LTTs, stocks, and gold but more volatile versions of each....maybe zeros, SCV and aggressive large growth, and gold mining stocks and 2X gold) helped some but still couldn't give a consistent 4-5% or so real return in the 1950s and 1960s. Tweaking the PP by switching to a 3x33 (the opposite of tilting...getting RID of all the cash) didn't help much either from 1952-1967 (or any a hypothetical future environment where stocks rise but LT bonds and gold fall) because the greater punch of the stocks was mostly counteracted by the falling gold and LTTs. Maybe (perish the thought and I hope I don't get banned for the heresy of saying this) the PP simply doesn't work in an environment of rising rates and falling gold prices when starting from a base of low interest rates. Simple "tweaks" to the basic PP 4x25% framework might not fix this any more than simple tweaks would fix something else (say, an Earth-centric solar system theory...tweaking it by moving Jupiter and the sun closer or farther from Earth won't fix it because the whole basic premise doesn't take into account what actually happens and actually exists) that had a fatal flaw in it from the get-go.
What the PP
really needs to fix this IMO is for cash to become as volatile (on the upside....when rates rise) as LT bonds in a deflation or declining rate environment, stocks in prosperity, or gold in inflation or negative real rates. In other words, you'd be willing to take a loss on your cash in times of falling rates in order to get a bigger gain in times of rising rates. There are several ways to do this (swaps, options, etc) if you are interested but they do kind of violate HB's principles of "no counterparty risk" and of keeping cash as "dry powder for rebalancing" that can't lose money.
